From the Editor: Europe’s gas supply balance remains precarious [Gas in Transition]
“On a knife edge” is how the Bruegel group appropriately describes Europe’s summer gas supply and demand balance. It is a description which contrasts heavily with the feeling of relief accompanying the end of the Winter 2022/23 heating season
Europe has done extremely well to weather the storm of Russia’s invasion of Ukraine. Gas inventories are far higher than anyone had a right to expect, which provides a solid base for rebuilding back to 90% by the start of the next heating season on October 1.
Europe’s previously spare LNG regasification capacity has been used to the full and new import capacity has been rolled out at extraordinary speed, a process which will continue over the course of 2023. In addition to the new floating storage and regasification unit (FSRU) at Eemshaven in the Netherlands, Germany has, in just 12 months, put three FSRUs in place at Wilhelmshaven, Lubmin and Brunsbuettel, respectively.
There are other reasons to be positive.
Last year, gas consumption for power generation was stable, rather than reduced, which might have been expected, given the high price of gas and the need to preserve stocks. This was because of low output from France’s nuclear fleet, which typically provides electricity exports to a number of neighbouring countries, and reduced hydro generation across Europe, following a very dry summer.
Low nuclear and hydro generation meant gas plants had to run. French nuclear generation last year was the lowest since 1988. This year, however, it is expected to return to a target set by EDF at 300-330 TWh, up from 2022’s 279 TWh.
In addition, Europe continues to add renewable energy capacity. 19.1 GW of new wind was installed across the continent last year, 2.5 GW offshore. Industry association WindEurope expects Europe to build an additional 129 GW over the period 2023-2027. In addition, a record breaking 41.4 GW of solar was commissioned in Europe last year. A record three million heat pumps were also installed, presenting a growth rate of 38%, reducing demand for gas heating.
Yet complacency would be dangerous.
France’s nuclear output, even if it hits the upper end of its target of 330 TWh, is low in comparison with previous years, excluding 2022. French nuclear generation in 2021 was 379 TWh. While France will require fewer power imports, it looks unlikely to resume exports at previous levels, and the target set could still be vulnerable to setbacks, if reactor restarts are delayed or other units have to come offline. France’s nuclear fleet is old and increasingly creaky.
The outlook for hydro generation is also uncertain. France has experienced its driest winter on record. Reservoir stocks in week 8 were 17% below last year’s levels. The government has already introduced emergency water conservation measures. Some of France’s nuclear plants are dependent on river water for cooling and low water levels can stop them operating.
Gas-dependent Italy’s reservoirs are 7% lower than last year, when they were already low. The River Po in February was more than 3 metres below its normal dry point in summer, an indication of the lack of precipitation in the Alps, which has impacted Austrian and Swiss reservoir recovery. In short, hydro power could well underperform this year in similar style to 2022.
Big hole to fill
There will also be a lot less Russian gas coming to Europe this year. The war in Ukraine started at the end of February last year, so Europe received normal volumes of Russian gas for at least two months of 2022. Moreover, volumes flowing through Poland and Ukraine were not cut off or reduced immediately. The upshot is that Europe, on current flow rates through Ukraine and the South Stream pipeline, is likely to receive more than 40bn m3 less Russian gas this year, compared with 2022.
About three-quarters of this will be offset by the high level of gas inventories with which Europe will end the winter 2022/23 heating season. But it still implies a combination of further cuts in consumption and increased LNG imports to reach the 90% full inventory levels now required by law before the start of winter 2023/24.
Gas conservation needs to continue
It is worth looking at just how Europe reduced its gas consumption last year. Industry played a huge role through a combination of reduced production, switching to different fuels, mainly oil, and improved efficiency. This totalled 25bn m3 of the 55bn m3 decline in gas use across the EU, according to International Energy Agency (IEA) data.
Even if that effort can be continued and perhaps increased, it is by no means desirable. Production curtailments accounted for half of the decline in industrial gas consumption.
The power sector saw no real savings because the low level of nuclear and hydro generation meant gas-fired power stations had to operate.
The bulk of the remainder, 28bn m3, came in the residential and commercial sectors, of which around 18bn m3 is attributed to warmer-than-normal temperatures. Efficiency improvements accounted for 3bn m3 and fuel switching and behavioural changes made up the rest.
The weather-related savings could disappear altogether in the event of a hot summer and harsh winter, both of which push up gas and power demand. If that is the case – and assuming current levels of Russian gas imports continue – Europe would be looking for either much more LNG or even deeper and more painful cuts in industrial gas consumption.
Scenarios in which Russia cuts its gas exports to Europe further, imply even more LNG and/or conservation.
Can the LNG market respond?
The answer in the short-term, unfortunately, is no. LNG import capacity is not the same as LNG supply and it takes time to bring new liquefaction plants on stream.
Freeport LNG, it is hoped, will return to normal operation, but, as it was operating for the first half of last year, this will not represent a major gain year on year in terms of total supply. Reuters reported in early March that US LNG production was flat in February from January and 9% above year ago levels, including the partial restart at Freeport.
US LNG plants ran hard last year and peak production levels cannot be sustained indefinitely.
The only major new liquefaction capacity is expected to come from BP’s Tangguh Train 3 and the Tortue-Ahmeyim Floating LNG project, which straddles Mauritanian and Senegalese waters. The latter is not expected to start operating until the end of the year and will in any case have a capacity of only 2.4mn mt/yr. Tangguh Train 3, which could start shipping as early as July, is also relatively small, being a plant expansion project. Train 3 will add 3.8mn mt/yr of capacity.
These increases are, of course, very welcome, but relatively small when set against scenarios in which Europe needs more LNG than last year and Chinese buying also rises as its economy recovers from COVID-19 restrictions.
They are sufficient, if Europe can continue its gas conservation efforts and Asian LNG demand remains muted. An expected increase in Chinese LNG demand could be offset by less consumption in South Korea and Japan as they rely more on other energy sources, including nuclear power.
As a result, Europe appears to be enjoying the calm of the eye of the storm. A certainty is that it will need high levels of LNG imports this year, although it is possible that they are lower than last year, if all goes well. It is equally possible that Europe needs more LNG to get to the point where it wants to be in terms of storage before next winter starts. And what if next winter is cold?
In 2022, Europe did pretty much everything it could and it got lucky with the weather. In 2023, it needs to do more of the same, hope that there are no further major supply disruptions and that the weather Gods continue to look kindly on the continent.